Think tank praises ‘pot for life’ plans

A think tank has praised the government’s ‘pot for life’ plans to consolidate the multiple smaller pension pots that have been spawned by auto-enrolment.

The Social Market Foundation (SMF) has published a briefing note welcoming the Department for Work and Pensions’ (DWP) proposal to establish multiple consolidators to help reduce the existing stock of small, deferred pension pots. 

The document entitled “Member choice, to complement small pots’ consolidation, culminating in a single pot for life” has been written by industry experts Michael Johnson and Tom McPhail, who highlight how over one million new sub-£1,000 pots are being created every year due to auto-enrolment.

To help arrest this flow, the briefing note proposes that members of workplace pension schemes should be given the right to choose an alternative destination for both their own and their employer’s pension contributions and has dubbed this: ‘member choice’.

The note added that a change of employer would then be less likely to create a new pot because employees would naturally continue to use their chosen pot.

The document, which was published in December, said: “Pensions auto-enrolment is an undoubted policy success, save for one unintended consequence – it is producing a torrent of new small deferred pots that no longer receive contributions. Deferred pots in the master trust market are projected to grow to around 27 million by 2035 if no changes are made to address the problem. 

“In the recent Autumn Statement, the Chancellor announced a call for evidence on a lifetime provider model. This would help individuals to move towards having one pension pot for life, thereby helping to tackle the long-standing problem of ‘small pot’ pensions.”

Right to choose

The 14-page document suggested that any potential destination pot should be required to meet auto-enrolment’s qualifying scheme criteria, notably in respect of minimum contributions, member protections, and access to a charge-capped default investment option.

It suggested a phased implementation with individuals initially being given the right to choose where their contributions are paid to. However, it added that subsequently, individuals’ right to choose could become the default route.

The report also contains a ministerial foreword by MP Paul Maynard, who said he is keen to hear from pension experts to help create ‘a simpler system of workplace pension saving’. 

The pensions minister said: “Recently, the Government set out its solution in the consultation, Ending the proliferation of deferred small pots, where we have been clear that we will take action to address this challenge by introducing a small number of authorised schemes to act as consolidators for eligible deferred small pots.

“Implementation of this approach remains my priority, ensuring that we are able to deal with the current stock of deferred small pots given this represents a cost savers are bearing today. 

“However, this approach will not completely eradicate the issue – given it will not prevent the flow of future multiple pots from being created.

“That is why alongside the consultation response, I launched an open Call for Evidence looking to understand the potential benefits of a longer-term vision of a simpler system of workplace pension saving where individuals do not create a new pot each time they change employment.”